FOREX-Euro firms on speculation over Greek rescue

* Investors eye EU meeting for potential Greek support

* Weight of euro positioning forces short squeeze

* Overall euro sentiment still negative

(Adds quotes, detail)

By Neal Armstrong

LONDON, Feb 9 (Reuters) - The euro rose on Tuesday, lifting further off recent 8 1/2-month low against the dollar as market speculation that a bailout would soon be organised for Greece prompted a squeeze of vulnerable short positions.

But the single currency pared gains after a spokesman for European Central Bank President Jean-Claude Trichet said the ECB chief had chosen an earlier flight from a meeting of central bankers in Sydney early for purely logistical reasons.

The euro slipped nearly 20 ticks against the dollar to $1.3698 and was last at $1.3702, up 0.4 percent on the day.

Speculation of a rescue for Greece emerged after officials at the ECB and the Reserve Bank of Australia said Trichet was cutting short his visit to Australia to attend a pre-arranged European Council meeting on Feb. 11. [ID:nSGE61801C]

"We are seeing a squeeze of some short euro positions which were established at low levels as market speculation of a Greek bailout is seen as positive in the near term," said Antje Praefcke, currency strategist at Commerzbank in Frankfurt.

Trichet's spokesman said the ECB chief was changing his flight plans because of logistics and that he had accepted the invitation to the summit in mid-January.

At 1025 GMT the euro EUR= had risen 0.6 percent on the day to trade at $1.3730, just off the day's high of $1.3746.

However, gains were capped as investors remained wary of pushing the euro too high as concerns about the fiscal positions of euro zone states including Greece, Portugal and Spain weighed on sentiment towards the single European currency.

For a graphic on the euro and Greek bond spreads, click

here

"Overall sentiment towards the euro remains bearish and this morning's rally has been a function of positioning. Any sense of optimism towards the euro can squeeze the market quickly, but overall the currency is still vulnerable", said HSBC's Paul Mackel.

Latest CFTC positioning data showed a build-up of short euro positions [ID:nN05162244], leaving the currency susceptible to a squeeze on any perceived good news.

"While a potential European support package for Greece would likely lead to a near-term relief euro rally, it is unlikely to alter the medium-term downward trend." said BTMU currency strategist Lee Hardman in a note.

The euro was also holding a firmer tone versus the yen with gains of around 1 percent at 123.20 yen EURJPY=R. It fell to its lowest levels in nearly a year on Friday as sentiment surrounding the euro zone currency deteriorated further but picked up some of the lost ground on Monday.

An improvement in risk appetite was fuelling some paring of yen longs which had been established during last week's bout of risk reduction. Euro zone shares [.EU] were in positive territory, aided by a rebound in Greek stocks. [ID:nATH005180].

The dollar was holding a softer tone versus a basket of currencies .DXY, trading down 0.2 percent at 80.132, thanks to the slight uptick in risk appetite.

Overall, the greenback remained close to Friday's high of 80.863, a level not seen since July 2009. The dollar remained supported due to its safe-haven appeal as uncertainty over euro zone states' fiscal health kept investors risk-averse.

BERNANKE

Later this week, markets will watch congressional testimony on Wednesday by Federal Reserve Chairman Ben Bernanke.

Bernanke will speak about unwinding of emergency Fed liquidity programmes and implications for the economic recovery.

The dollar was trading with gains versus the yen JPY=, up 0.4 percent at 89.55.

The yen also pared recent gains versus higher-yielding currencies such as the Australian dollar AUDJPY=R, though technical traders said the outlook for this pair remained negative while under the 200-day moving average at 79.34.

Traders said market players were wary that China may take a further tightening step before a week-long holiday next week.